the preposition here is "down" - prepositions describe relations between things, and here down says that something was down the street.
The prepositional phrase is the phrase with down - down the street.
It modifies the verb in the first and third sentences.
1) I saw the cat driving down the street.
3) I saw the cat driving down the street.
In both of the sentence the verb is in the form of present participle
I would choose sentence 1), as it's not ambiguous that the person is driving, not the cat
